Question

16.

A firm’s debt is publicly traded and recently quoted at 95% of
face value. The debt has a total face value of $5 million and is
currently priced to yield 6%. The company has 2 million shares of
stock outstanding that sell for $10 per share. The company has a
beta of 1.5. The risk-free rate is 3%, the market risk premium is
8%, and the corporate tax rate is 35%. What is the market value of
the company’s debt? **(Do not round intermediate
calculations. Round the final answer to 2 decimal places. Omit any
commas and the $ sign in your response. For example, an answer of
$1,000.50 should be entered as 1000.50.)**

**17.** A firm’s debt is publicly traded and
recently quoted at 90% of face value. The market value of the
company’s debt is $9 million. The market value of the company’s
equity is $27 million. The book values of the company’s debt and
equity are $10 million and $20 million, respectively. What is the
equity capital weight that should be used to calculate the firm’s
WACC? **(Do not round intermediate calculations. Round the
final answer to 2 decimal places. Omit the % sign in your response.
For example, an answer of 15.39% should be entered as
15.39.**

Answer #1

16.

Face value of debt | $ 5,000,000 | |

Market value as a %age of face value | 95% | |

Market value of debt |
$
4,750,000 |
=95% * 5,000,000 |

17.

The market value of the company's debt = $ 9 million

The market value of the company's equity = $ 27 million

For the calculation of WACC, the market value are considered.

Hence, the equity capital weight that should be used to calculate the firm’s WACC = 27 / (27+9) = 75.00%

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